American Century College Investing Study Shows More Parents Planning to Use 529 Plans.

Business Editors

KANSAS CITY, Mo.--(BUSINESS WIRE)--Oct. 24, 2001

American Century:

Parents Say 529 Plans Encourage More College Saving

Tax Benefits a Key Attraction

As children get settled into school and hit the books, their parents have been busy boning up on state-sponsored 529 college savings programs, according to a national survey sponsored by American Century Investments.

"Funding their children's education is a significant challenge for many parents, so it's not surprising that they seek out advantageous ways to save for that important financial goal," said Doug Lockwood, vice president of shareholder education at American Century.

"While the number of parents taking advantage of state-sponsored college savings plans remains relatively low at six percent, we've seen a substantial increase in awareness of 529 plans, as well as significant growth in the number of parents who intend to use them," Lockwood said. "With continued investor education, we believe that these numbers will continue to grow as parents come to understand the benefits of these programs."

The second annual "American Century College Investing Study" -- a telephone survey of 500 adults with children younger than 18 years old -- found that 37 percent of parents were aware of state-sponsored 529 plans, up from 24 percent in 2000, the first year of the study. More importantly, perhaps, 39 percent of those surveyed indicate that they are likely to participate in a 529 plan in the future, compared to 31 percent last year.

American Century is the program manager for the Learning Quest Education Savings Program, a 529 college savings program established by the State of Kansas. Learning Quest is available nationally.

529 Plans Encourage Savings

Parents say that 529 plans provide them significant incentive to save for college costs. Among parents who already have begun to save, 44 percent say that 529 plans would lead them to save more using this type of plan. That was nearly double last year's response. Meanwhile, an overwhelming majority (70 percent) of those who haven't yet begun to save say that 529 plans will lead them to start saving for their children's education costs.

Tax Benefits Gain Importance

Parents increasingly ranked the tax benefits of 529 plans as important features. In 2001, 81 percent of respondents ranked tax-deferral of the account's growth as important, compared with 75 percent last year. Additionally, 76 percent of respondents indicated that earnings taxed at the student's rate when withdrawn is an important benefit, up from 66 percent last

year.

Study respondents also ranked several other important features, including parental control of the account (83 percent) and the ability to send a child to any accredited school in the U.S. (82 percent).

Lockwood predicts that recent changes in the tax law will make 529 plans even more attractive to savers. "The $1.35 trillion tax cut enacted in June dramatically enhances the tax benefits of 529 plans," he said. "Beginning in 2002, 529 plan withdrawals will be tax-free if the money is used to cover qualified college costs." Currently, withdrawals are taxed at the student's tax rate.

Lockwood also notes that Congress recently eliminated the ban on making contributions to both Education Savings accounts (formerly called Education IRAs) and 529 plans, which will give parents more flexibility to use both plans.

Uncertainty Increases

The recent market volatility may have made parents less confident about their ability to reach their college savings goals. In this year's study, about half believe they will meet their goal, which is down significantly from 57 percent last year.

In addition, one out of five parents are unsure of their ability to meet their college-savings goal, up from 13 percent last year.

"Parents are understandably nervous in this market climate," Lockwood said. "However, short-term volatility shouldn't deter them from sticking to their investment plan. Regardless of market conditions, the sooner parents start saving, the more likely they are to meet their financial objectives."

Savings Gap Persists

In the 2001 study, many parents continue to underestimate the costs of sending their children to college. More than half (60 percent) expect one year of their child's post-secondary education to cost less than $15,000, and 38 percent expect the cost to fall below $10,000.

Parents may be surprised to discover that the actual costs are far greater than they anticipate. Estimates for the average total cost of four years at an in-state public college -- including tuition, room, board, supplies and other expenses -- are $56,500 to $48,800 for children who currently are 15 to 18 years old, while a private college ranges from $124,400 to $107,500 for the same age group(a).

For parents with younger children, costs escalate: parents with a five-year-old today can expect to pay more than $90,000 for four years at an in-state public college, or more than $200,000 for a private college.

Of the parents who anticipate that their child will attend some type of post-secondary education, almost 3 out of 4 (72 percent) are currently saving for that purpose. The amount saved, however, is relatively low: half of the parents surveyed have saved less than $10,000 toward their goal.

"Learning Quest and other state-sponsored 529 plans are a great way for parents to bridge this savings gap," Lockwood said. "These plans offer parents the flexibility and control they need to meet their goals, and the new tax laws make them more effective than ever."

Grandparents Chip In

For many families, grandparents will play a major role in college savings. Almost one in five parents (19 percent) indicate that the child's grandparents or other family members will contribute to the child's postsecondary education. Of those parents who anticipate using the child's grandparents to contribute, more than one-half (57 percent) indicate that the grandparents have savings or investments specifically for this purpose.

Elrick & Lavidge, a national research firm, conducted the 500 phone interviews for the "American Century 2001 College Investing Study" in summer 2001. Only parents indicating they had a child under the age of 18 were included in the random sample. Findings are significant within +/- 3 percent at a 90 percent confidence level.

About Learning Quest

Introduced in July 2000, Learning Quest allows investors across the county to set aside money for a child's education.

Learning Quest offers three investment tracks: conservative, moderate and aggressive. The account owner chooses a track based on a self-assessment of risk tolerance and time horizon when the account is opened. Within each track is a series of asset allocation portfolios that automatically adjust to a more conservative mix of investments as the student gets closer to college. Various combinations of American Century mutual funds serve as the underlying investment vehicles for the asset allocation portfolios.

More information on Learning Quest is available by calling 1-800-579-2203 or by visiting www.learningquestsavings.com.

About American Century

American Century is a premier investment manager serving nearly two million individual and institutional investors. Through its broad selection of mutual funds and separate accounts, the Kansas City, Mo.-based company manages about $90 billion in assets. James E. Stowers, Jr. founded the company in 1958 and serves as chairman. His son, James E. Stowers III, is co-chairman and William M. Lyons is president and chief executive officer. For the past two years, American Century has been selected as one of FORTUNE Magazine's 100 Best companies to work for in America. For additional information, visit www.americancentury.com.

Learning Quest is administered by Kansas State Treasurer Tim Shallenburger and managed by American Century Investment Management, Inc. Accounts established under Learning Quest and their earnings are neither insured nor guaranteed by the State of Kansas, the Kansas State Treasurer or American Century.

(a) Source: Estimate based on data reported by the College Board from "Annual Survey of Colleges in Trends in College Pricing, 2000," www.collegeboard.com.